May 5, 2004, 12:00 AM

The New Wal-Mart?

In nine years, Amazon.com has become the giant of the Internet. Much like the way Wal-Mart transformed offline retailing, Amazon is setting the pace online, in merchandising, pricing, technology and many other fields.

When Amazon.com Inc. was born on the web in 1995, selling books out of Jeff Bezos’s garage, its name was decidedly out of proportion to its size. But it reflected Bezos’s ambitions for the company and today, nine years later, few dispute that Amazon is living up to its namesake river. It accomplished in eight years what it took Wal-Mart Stores Inc. 20 years to achieve-$5 billion in annual sales-and its future is nothing but up, analysts and consultants say.

To Amazon’s management team, though, the company is just getting started. “We want to be the biggest mass merchant on the web,” asserts Jason Goldberger, who as senior category manager plays a lead role in building out Amazon’s retail strategy.

Amazon already is the biggest, with well over 10 million SKUs at Amazon.com and sister sites around the world, 38 million unique visitors every month and $5.3 billion in 2003 net sales, up 36% from 2002 net sales of $3.9 billion. It is nearly double the No. 2 Dell Inc., which sells $2.8 billion worth of computers and equipment via its web site, and more than twice the size of No. 3 Office Depot Inc. with $2.6 billion But that’s not enough. “We want to be even bigger,” Goldberger says.

Amazon plans to continue its growth through a number of initiatives. It’s offering more products of its own with more special sections dedicated to such diverse categories as sports equipment, jewelry and gourmet food. It continues to build and improve its merchant associates or affiliate program, through which 900,000 web sites send leads to Amazon. It is expanding its relationships with other retailers, hosting products from thousands of other merchants, including more than 500 in its Gourmet Foods section alone. It provides the online operating platform for major retailers including Toys R Us Inc., Borders Group Inc. and Target Corp. And it’s encouraging free use of its web services development kit to help retailers and other web site operators link to Amazon and analyze its customer transaction data.

These multiple strategies, retailers and analysts say, are bringing Amazon hordes of shoppers and incremental sales. “America is shopping at Amazon.com,” says Sam Taylor, vice president of e-commerce for apparel retailer Lands’ End, a division of Sears, Roebuck and Co. which has a presence at Amazon. “At Lands’ End, we want to be wherever customers shop.”

And it isn’t only America that’s shopping Amazon. The company’s sharpest growth is coming from its four sites outside of North America, which serve the U.K., Germany, France and Japan. Combined net sales at those four sites grew 71% last year to $2 billion, up from $1.17 billion in 2002. That growth amounted to nearly four times the 18% increase in U.S. and Canadian sales, which rose to $3.3 billion last year from $2.8 billion in 2002, and will provide Amazon with an important source of revenue to help maintain its competitive strategies in the U.S., analysts say.

But analysts point out that Amazon faces challenges as it continues to grow. As it adds products and categories to move further beyond its initial core of books, music and videos, for example, it faces higher operating costs in such areas as fulfillment and marketing. It faces growing competition from web portals and shopping comparison sites as a source of online selling space. Although its platform services business is growing revenues and producing solid margins, its development in this area depends on the success of the merchandising skills of its client merchants. And as it works with thousands of outside developers who are using its technology to link retailers to it, Amazon must absorb growing expenses related to maintaining a base of computer scientists and merchandise experts.

Amazon lists in its financial statements filed with the Securities and Exchange Commission 24 “significant” wholly-owned subsidiaries, including foreign-based web sites, fulfillment services, e-commerce platform services for other retailers and a movie database. “Our biggest concern is that management might invest in too many new businesses-and that one or more of them might flop,” says Joseph Beaulieu, senior stock analyst at investment research firm Morningstar Inc., in a recent report on Amazon.

So far, Amazon hasn’t stumbled, analysts say. It just completed its first year of net profits, a trend analysts expect to continue. It posted net profit of $35 million on net sales of $5.3 billion for the year ended Dec. 31, 2003, compared to a net loss of $149 million in the prior year. Amazon’s operating expenses grew 6% to $986.6 million last year from $928.5 million in 2002, led by a 21% increase in fulfillment costs. Expenses related to marketing and technology infrastructure declined slightly, while expenses rose related to general administration and stock-based compensation. Amazon says it expects to continue investing more in personnel, including computer scientists, which may offset savings in technology and other costs.

It finished last year with a surge in financial performance, as Q4 net income rose year-over-year to $73 million from $3 million, on a 36% rise in net sales, to $1.9 billion from $1.4 billion.

Still, reaching Amazon’s full potential-whatever that may be-will require a lot of work, analysts say. For all of Amazon’s success so far in expanding its product lines through direct sales as well as through alliances and servicing deals with other retailers, the online behemoth has taken a relatively small step beyond its initial roots of selling media products.

The majority of Amazon’s direct sales are within its initial category of books, music and videos, where Amazon reports sales of $4 billion, 77% of all worldwide revenue. “Amazon is still working on changing its image from just a place where customers can buy media,” says Safa Rashtchy, stock analyst who follows Amazon for Piper Jaffray & Co. “Certainly it has succeeded somewhat, but it still has a long way to go.”

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